The candidates’ positions on Medicare Advantage

March 23, 2012: Mark Findlay and his wife Delores Findlay, of Erie, Pa., read the morning newspaper inside their home at Limetree Park where they spend the winter months in Bonita Springs, Fla. Medicare and Social Security, the massive programs that pay benefits to tens of millions of older Americans, are contentious issues in the 2012 presidential campaign.

President Obama and his allies continue to repeat attacks on Gov. Mitt Romney and his running mate Rep. Paul Ryan that were long ago discredited as completely false. That Republicans want to “end Medicare as we know it” is a popular line from the Democrats, but there’s nothing in the Romney-Ryan plan that ends Medicare as anyone has known it. Indeed, the whole point of the Romney-Ryan reform is to preserve Medicare for future generations. We are also told that the Republican plan would force seniors to pay $6,400 more per year for their care. This too is false. The Romney-Ryan plan guarantees that every senior will have the choice of at least two plans which will cost no more than current Medicare.

To see what the candidates really think about Medicare, voters need to set aside the overheated campaign rhetoric and look at the facts, starting with the candidates’ policies for Medicare Advantage. The differences are stark, and revealing.

“To see what the candidates really think about Medicare, voters need to set aside the overheated campaign rhetoric and look at the facts, starting with the candidates’ policies for Medicare Advantage.” -James C. CaprettaMedicare Advantage is the popular private plan option in Medicare. Twenty-five percent of Medicare beneficiaries have chosen to get their Medicare benefits from a Medicare Advantage plan.

The president targeted Medicare Advantage for big cuts in the 2010 health care law to partially pay for the large entitlement spending also provided in the law. Over the next ten years, these cuts will reach $308 billion, according to the Congressional Budget Office. That these cuts will affect Medicare beneficiaries is indisputable. According to the most recent Medicare Trustees’ Report, enrollment in Medicare Advantage will peak in 2013 at 13.7 million people and then fall to 9.7 million in 2017. Four million seniors will thus get pushed out of the Medicare Advantage plan they prefer as a direct consequence of the Obamacare cuts.

Medicare Advantage plans are paid based on a legislative formula, and any payments they receive above what is necessary to provide the basic Medicare benefit must be provided to the beneficiaries of the plans in the form of expanded benefits, such as lower deductibles and copayments for services. In effect, then, the entire $308 billion in Medicare Advantage cuts will come out of the pockets of senior citizens. In a study I co-authored with Robert Book, we estimated that the average Medicare Advantage beneficiary would be forced to pay $3,700 more for their health care in 2017 because of the cuts.

The Obama administration officials say these estimates are overblown, and they point to the rise in Medicare Advantage enrollment in 2012 to bolster their case. But the rise in 2012 enrollment is due to an unprecedented, and perhaps unlawful, “demonstration program” through which the administration is funneling $8.3 billion in taxpayer funds to the Medicare Advantage plans to mitigate the political impact of the cuts during a presidential election year. Certainly, there is no public policy rationale for the payments, as the Government Accountability Office has indicated. Once the election is over and the artificial and temporary bump-up in payments is terminated, as it inevitably will be, the Medicare Advantage plans will be forced to pare back benefits, and enrollment in the plans will drop.

These cuts will be particularly harmful for the millions of low-income seniors who are disproportionately enrolled in Medicare Advantage plans. Research indicates that these seniors — those just above the poverty line but below about twice that level — are 19 percent more likely than the average beneficiary to enroll in a Medicare Advantage plan. These seniors cannot afford the $180-per-month premium charged by the typical Medigap insurance plans, and they don’t have access to additional coverage from a former employer. Consequently, they find the lower cost-sharing and premiums charged by many Medicare Advantage plans to be very attractive.

The president and others who want to cut Medicare Advantage often assert that the private insurers are less efficient than the traditional Medicare program, which is fee-for-service insurance. But this is false as well. Data from the Medicare Payment Advisory Commission confirms that Medicare Advantage plans, and especially the HMOs, can provide the Medicare benefit package to seniors at a cost well below that of the traditional program. In 2012, based on the premium submissions from the plans, MedPAC reports that the average Medicare Advantage HMO is providing Medicare benefits at just 95 percent of the traditional program’s costs.

This should not be surprising. The traditional Medicare fee-for-service insurance is an extremely inefficient model. There is no incentive for either the providers or the enrollees (most of whom have supplemental coverage beyond Medicare) to control the use of services. Thus, the volume and intensity of service use rises dramatically each year. Moreover, there is no coordination among those providing medical services to the patients, which leads to fragmented and low-quality care in too many instances.

Gov. Romney and Rep. Ryan have an entirely different perspective on Medicare Advantage. They oppose the president’s Medicare cuts and will reverse them if elected. That’s step one toward a more sensible destination. But they would also build upon the strengths of the Medicare Advantage program to reduce costs and sustain the program for future generations. Under their approach, the Medicare Advantage plans would compete directly with each other and the traditional Medicare option based on a competitive bidding system. Because Medicare Advantage plans are expected to be less expensive in about two-thirds of the country, this would reduce Medicare’s costs very substantially. A recent study conducted for the American Enterprise Institute by researchers Bryan Dowd and Roger Feldman estimated that a bidding system as proposed in the Romney-Ryan plan would save 5 percent of program costs. That would go a long way toward shrinking Medicare’s massive unfunded liabilities.

The president and his allies want to shrink Medicare Advantage because they prefer the direct government control of the traditional program. But it is completely false to suggest that shrinking Medicare Advantage will improve the efficiency of the program. It won’t. In fact, as Gov. Romney and Rep. Ryan clearly understand, Medicare Advantage is the foundation upon which a more cost-effective program can be built.

James C. Capretta is a visiting fellow at the American Enterprise Institute and a fellow at the Ethics and Public Policy Center. He was an associate director at the Office of Management and Budget from 2001 to 2004.